CBO: Deficit will tumble this year, but obsession with fiscal tightening will hurt economic growth

The Congressional Budget Office released its 10-year forecast for the economy Tuesday. You can read a condensed version here. The news that is getting the most headline attention in the report is the fact that the annual deficit will fall in 2013 below a trillion dollars—an estimated $845 billion—for the first time since 2008. That's 5.3 percent of gross domestic product, half of what it was in 2009 compared to the size of the economy then. Assuming federal budget policies were to remain the same, the deficit would continue to fall for several years, reaching 2.4 percent of the GDP in 2015, before starting a slow rise again in 2016, the CBO says.

What's not getting as much headline attention is what Brian Beutler points out: The counterproductive obsession with cutting the deficit has worked to do just that but "at the expense of the still-struggling economy":

“conomic activity will expand slowly this year, with real GDP growing by just 1.4 percent,” according to CBO’s projections. “That slow growth reflects a combination of ongoing improvement in underlying economic factors and fiscal tightening that has already begun or is scheduled to occur-including the expiration of a 2 percentage-point cut in the Social Security payroll tax, an increase in tax rates on income above certain thresholds, and scheduled automatic reductions in federal spending. That subdued economic growth will limit businesses’ need to hire additional workers, thereby causing the unemployment rate to stay near 8 percent this year, CBO projects.”

The most recent government report puts the official unemployment rate at 7.9 percent. (Critics, including me, have argued since the Bush administration that the official rate severely understates the true unemployment situation.) And while the official rate had fallen to 7.8 percent last September, CBO does not expect it to drop below 7.5 percent before 2015. It has been 70 years since the last time the United States experienced an unemployment rate that high for longer than six consecutive years.

A key reason for failing to reduce unemployment faster is because of fiscal belt-tightening and tax adjustments. That includes the reinstatement of the 2 percent payroll tax cut that affects consumer spending and cuts in government spending. The latter sent GDP growth for the fourth quarter of 2012 into negative territory for the first time in three and a half years, the government reported last week. Most of the reduced spending was defense-related. Read more about the CBO's report below.
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